The luck of the Irish has finally run out. Having roared away lustily for a decade or so, the Celtic Tiger has now rolled over on its back, all four paws stiffly in the air. In the late 1990s, Ireland became well-heeled for the first time in its wretched history, and in some respects even outstripped its former colonial proprietors. In this newly affluent nation of software and low taxes, bent bankers and microchip exporters, house prices in Dublin shot up by 519% between 1994 and 2006, probably the biggest such boom on the planet. It was a land of massive tax breaks and of financial regulation so light as to be invisible to the naked eye. As Ireland grew more dependent on foreign investment for its manufacturing than almost anywhere else in the world, the New York Times dubbed the country "the Wild West of European finance".

Despite the fact that much of the world's Viagra is manufactured in County Cork, this extraordinary upthrust could not be sustained. Irish GDP is now shrinking faster than in any other advanced economy, and the country's gross indebtedness is larger than Japan's. House prices have fallen more rapidly than any others in Europe, and the average Irish family has lost half its financial assets. Unemployment has risen faster than anywhere else in Europe. By 2007, the country was €10bn in the red and a banking system massively complicit in fraud and tax evasion was just about to enter meltdown. In September last year it finally imploded, awash with billions in bad loans to property sharks. In its rise and fall, as Fintan O'Toole remarks in this superb polemic, "Ireland made Icarus look boringly stable." It had moved from being the poster child of free-market globalisation to one of the great economic basket cases of modern history.

All this has been accompanied by a culture of corruption so shameless and spectacular that it makes Dublin look like Kabul. The former prime minister Charles Haughey stole €250,000 from a fund set up to pay for a liver transplant for one of his closest friends. Last year, the chairman of Anglo Irish Bank resigned when it emerged that he had €84m in loans from his own bank, a sum concealed by an annual (apparently legal) cooking of the books. As O'Toole points out, bribery, tax evasion and false evidence under oath have not simply gone unpunished; the very idea of penalising the culprits is viewed by the governing elite as unsporting or even unpatriotic.

This is partly because Ireland, having in O'Toole's words "imported" its modernity from elsewhere, is in some ways a country with a first-world economy and a third-world political system. Local, cronyist and clientelist politics still thrive. The state is widely seen as "a private network of mutual obligations" rather than an impersonal body. Palms are greased, backs scratched and old pals promoted, often without much sense that this is anything other than the natural thing to do. The discrepancy between formal and informal codes in the country, between official behaviour and nods and winks, bulks large. Stretching a point or turning a blind eye is rife, in ways that would scandalise many a German or American. What may be agreeable in personal terms can prove lethal in public ones. It is the kind of thing that can happen in a country where everyone seems to have been at school with everyone else.

Some of this black-market behaviour harks back to the colonial era. Indeed, as this book perceptively argues, a good many of Ireland's current troubles spring from the persistence of old ways, not the emergence of flashy new ones. The Celtic Tiger years were to some extent simply a matter of the country belatedly catching up with other modern nations. The old-style Tammany Hall politics of power and prestige, along with what O'Toole sees as an anarchic attitude in business to law and morality, were part of what caused the rot. Ethical life was traditionally the preserve of the church; but now that that has been largely undermined, there is little sense of civic or public morality to take its place. In one of its documents, the Irish Central Bank proved unable to spell the word "ethics", while other banks have had more than orthographical problems with the term.

The pity of it, as Ship of Fools points out, is that the boom years were largely squandered. For a fleeting moment, the country had the resources to improve its crumbling social facilities. Instead, entranced by the possibility of tax cuts for the rich, it blew it. Perhaps its best hope now is to revert as soon as possible to third world status and qualify for a loan from the IMF.

Terry Eagleton's Reason, Faith, and Revolution: Reflections on the God Debate is published by Yale.